IPO Firms' Paying Overdue Taxes

For the healthy development of the capital market and the interests of investors,the Chinese securities regulatory authorities are very strict in auditing the application for initial public offering(IPO).The tax compliance is an important standard for the securities regulatory departments to judge whether a company has the listing qualification.It's so common in China that many companies have to pay overdue taxes in the IPO process because of the pre-IPO tax issues.Especially,after the news about the IPO firms paying overdue taxes in 2008,this problem has attracted more attentions.But unfortunately,the academic research on this problem still stays at the normative analysis,the depth of this study is slightly tasted.These important issues like "what time are paying overdue taxes most likely to happen?what cause paying overdue taxes?and whether it will affect the company's business performance and market performance after the listing?"are still unkonwn.Therefore,this paper attempts to study these issues with empirical methods to gain a deeper understanding of the features,motivations and economic consequences of IPO overdue taxes,and also provides some regulatory measures and implications for the securities regulatory authorities.Using a sample of Initial Public Offerings(IPO)firms listed in Chinese A-share market during 2002 to 2014,this paper systematically researches the features,motivations and economic consequences of listed firms' paying overdue taxes in the process of IPO for the first time.The results show that:(1)about 60%of Chinese IPO firms pay overdue taxes,and the estimated average tax amount is about 34 million Yuan,which mainly occur in one or two years before IPO;(2)the main reason for IPO firms' paying overdue taxes is neither improper accounting treatment nor owing taxes caused by the stress of cash flow,but the earnings management for adjusting profits;(3)IPO firms paying overdue taxes have better financial performance and market performance and lower possibility of financial performance face-off after their public listing,which means that earnings management leading to paying overdue taxes is more likely to be caused by "releasing hidden profits" rather than "inflating profits".Further study finds that after IPO,IPO firms paying overdue taxes have more robust financial policies and higher growth,and have lower level of tax avoidance which shows they right the tax wrongs.Also,institutional investors can identify the quality of these firms,which is expressed in that IPO firms paying overdue taxes with higher institutional ownership have better post-listing performance.Overall,IPO firms paying overdue taxes are common in China,but this is not necessarily a bad thing,because this phenomenon is very likely the good firms' signal transmission and error correction,rather than bad firms' tax costs for going public by manipulating profits.This reseach will help to improve the understanding of IPO firms paying overdue taxes,and also provides some regulatory implications for the securities regulatory authorities.We have found that IPO firms paying overdue taxes may play a role in helping IPO firms to discover and make up the shortcomings of internal control and financial system.So the securities regulatory authorities should strengthen the supervision of the IPO firms' tax information disclosure,and focus on the real reasons behind the paying overdue taxes rather than only requiring IPO firms paying overdue taxes.Moreover,continuous attention and supervison are necessary for the abnormal paying ovedue taxes firms after IPO.Deficiency of this paper is that the proxy variables in measuring the motivations of paying overdue taxes are inaccurate and we have not found direct evidences that IPO firms paying overdue taxes is because of"releasing hidden profits".